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China needs reform to revive FDI

BEIJING: China should revamp its regulations on foreign investment to help boost capital inflows as it braces for WTO entry, a senior government economist said.

"Joining the WTO will certainly be favourable for foreign investment," said Ma Yu of the Academy of International Trade and Economic Cooperation, a think-tank affiliated to the Foreign Trade Ministry.

"But how big an impact it will have on foreign investment depends on many domestic factors," he told Reuters in a recent interview. "The key is the government policy."

China signed a historic trade pact with the United States in November that clears its way to membership of the World Trade Organisation and holds talks with the European Union on a similar deal next week.

Under the Sino-US accord, China agreed to lower tariffs and give foreign investors wider access to its banking, telecommunications and insurance sectors.

But foreign firms in China will still face myriad restrictions ranging from licencing, geographic and equity limitations to export requirements.

"There must be concrete steps to make our laws and regulations more compatible to the WTO," Ma said.

REFORM NEEDED TO HELP SHORE UP FDI

Ma said foreign investment, which declined last year for the first time in more than two decades, would not regain momentum unless the government eased some of the restrictions.

"It will be very difficult if we continue to apply the examining-and-approving system on foreign investment," he said.

"It's no longer necessary to set equity limitations on foreign investors in manufacturing industries, Ma said.

China still maintains a 50 percent limit on foreign investment in automobile and several other industries. Foreign banks and insurance companies wait patiently in long queues for licences to operate.

Actual foreign direct investment (FDI), a main engine of the economy, fell to $40.4 billion last year from a record $45.6 billion in 1998, according to official statistics.

"The FDI could decline further this year, probably lower than $40 billion," Ma predicted.

China's contracted slipped 18.9 percent last year to $41.2 billion, official data showed.

The importance of money from abroad is reflected by the fact that foreign-invested firms produced nearly half China's exports last year and around 15 percent of fixed asset investment.

State media attribute the investment decline to recovering Asian economies luring some funds away from China, where deflation has cut profits.

But Ma said an underdeveloped legal infrastructure and a lack of rules on acquisitions and mergers between Western companies were also behind falling.

TEN PERCENT MARKET FOR FOREIGN BANKS

Instead of approving foreign investment on a case-by-case basis, China should set criteria for foreign companies to meet and set limits on market shares, Ma said.

"For example, we can allow foreign investors to hold a 10 percent share in China's total financial assets over five years," he said.

The opening of the banking industry alone would bring in some $100 billion in foreign capital, Ma said.

Foreign bank assets, estimated at more than $30 billion, account for roughly two percent of China's total financial assets, he said.

"It's still under Chinese control, but (opening the sector) will be a big step forward for foreign investors," he added.-Reuters